Osborne needs a plan A-plus not a plan B

A bunch of economists who generally get things wrong, write to The Observer to say they don’t like what Chancellor George Osborne is doing. His economic policies are wrong and we need to cut less and spend more. Are they right? No. Does Mr Osborne need a “Plan B” for the economy? No.
Following the IMF’s report vindicating the UK government’s economic strategy, the argument is over. At least for the time being. Good. Can we go home now?

Not yet, I’m afraid! George Osborne needs add to the current plan. It’s absolutely right that this country gets a grip of its deficit. The international markets need to know we are serious. Why? you may well ask. If you borrow £10 from a friend and promise to give them £12 in five years time with an option to have the money recalled every year, you’ll need to convince your lender that you are good for the money. If your lender ever thinks you might default, the next time you knock on their door, they’ll ask for a higher rate of interest to take account of the risk. The UK’s debt is rolling over all the time. We are continually borrowing from the international money markets and one key part of the economic strategy has to be to keep our borrowing costs low. Of that part of the equation, I’m comfortable.

Don’t expect our Chancellor to fix our economic woes. He can’t. Perhaps that’s where some of the media, politicians, commentators and indeed the public get this wrong. It’s the Chancellor who puts the building blocks in place to allow business to do what they do. Successful businesses generate tax. That tax rolls into the Treasury and the Treasury pays for the services and goods that we (or perhaps they) want.

However where the Chancellor can act is on lending to business and incentivising entrepreneurs to invest. Small and medium sized businesses, SME’s, will get us out of recession and it’s these companies who are struggling to borrow. Project Merlin promised that £19 billion would be lent in the first quarter of 2011 to SME’s. £16 billion is what was actually lent. And this is a problem. Yet are banks not lending enough or are borrowers not presenting themselves correctly? It’s a bit of both.

In order to improve business confidence some simple measures are required. Removing red tape. Developing a fairer tax system. A simpler tax system that rewards endeavour. Our system as it currently stands is far to complex. It also punishes those who strive to do well. It burdens companies big and small with bureaucracy and complexity that simply does not reflect well when it comes to competing in the global market. Plan A needs augmentation. Simplification.

But Plan A needs another element too. A plan for growth. Not one based on government spending. That would be a sugar fix. Intense maybe but short in duration. That’s what the dying embers of Gordon Brown’s government set in motion. Massive spending in areas that produce short-term economic growth spurts. Makes the figures look good for a while but like a sugar rush, once the money is spent, the benefit has gone. Look at the difference in the growth seen in the US. It’s faltering. Why? Because they didn’t kick start their economy and debt is way too high. Compare that to Germany that has generated long-term growth prospects by investment in research and development, reducing its debt and most importantly making the country a place where business wants to invest and reinvest. It’s not perfect and there are other problems that Germany has to cope with including the continued costs of integration, the Euro and fragile world demand.

What can our Chancellor do? Introduce more Enterprise Zones, enable infrastructure projects, incentivise companies to plough resources into research and development, fund grants and tax incentives… every plan should be led by encouraging the private sector to invest. Invest in the technology and infrastructure we need to make any growth real. It might take longer but we will all benefit with that simple two-pronged augmentation.

Meanwhile, a simple battle has to be won. We hear about “austerity measures”. Some are up in arms over cuts. Yet far too much money is spent on things the nation doesn’t need. If anything George Osborne’s cuts don’t go far enough. 0.6% for this financial year and 1% cuts in real terms for the rest of this parliament. That’s nothing when compared to Dennis Healey’s 3.9% cut in 1977 just following our embarrassing cap-in-hand mission to the IMF. We have thousands of people employed in the public sector who don’t need to be employed. We have procurement systems, layers of management and inefficiencies that the private sector washed away years ago. Archaic working practises, pay scales that don’t make sense, processes that are cumbersome and rewards for failure. This simply will not do. Cuts should be faster, deeper and instead of the glossed over attempts to reform we need to get to the real problems. Deep down in the nation’s engine we have some broken parts. They need to be removed. Replaced and streamlined.

The detractors will continue to march against cuts. Of course they will because turkeys don’t vote for Christmas. I understand but don’t agree. Taxpayers should be deciding what they want their money spent on. Taxpayers should be receiving value for money. Ultimately taxpayers should get a fairer deal. George Osborne does have his work cut out. Those who will get us out of recession are not receiving enough help whilst those protesting against reform and change are in danger of making so much noise that the real answers and policies may be drowned out. Let’s hope this doesn’t happen otherwise UK PLC will simply end up as an economic backwater.